Investing for Beginners: Everything You Need to Know About Mutual Funds

What was our motivation? Our daughter was born in February 2013 and, as cliche as it may sound, welcoming a baby in your life can truly change perspectives.

Plus, another huge goal we had back then was to drop everything and go. It meant letting go of jobs and whatever was holding us back, to give way to traveling full-time. Crazy as it may sound, but it was our ultimate dream, and building our travel funds to allow us to travel for (at least) a year was only possible through mutual funds.

Now, before you go and leave the blog to find out how and where to invest in mutual funds, there are some things you ought to know first.

After all, you bring in a lot of risk if you get yourself into something you have no idea about. The biggest investment you should make is KNOWLEDGE.

What are mutual funds?

Basically, mutual funds is a type of investment where investors pool their money together to create a larger fund.

This fund is then invested into different types of securities (stocks, bonds, deposits and many others) so that it can generate returns.

The returns can come from interest from borrowing (such as in bonds) or from company growth and dividends (such as in stocks).

A portion of the returns are then given back (after management fees and taxes) to the investors which they can choose to withdraw and spend or invest back into the fund.

The cycle is as shown below (I created it from an old post I wrote 4 years ago – but I don’t think I did such a great job at explaining the whole thing – so here I am again).

Where are mutual funds invested?

Mutual funds are often categorized into three ways (although they may have different names, depending on the company you get it from), depending on where the money is invested in:

Aggressive funds

This is typically what is suggested for the younger people. These types of funds have a higher appetite for risk – and this is because there’s a lot more time to make up for any losses that might be incurred along the way. The major advantage to having a higher appetite for risk is that you have a much higher potential of getting big returns for your money.

Aggressive funds are usually invested in the stock market.

Conservative funds

These types of funds are often suggested for capital preservation, and thus, for those who do not have a lot of time left to make up for losses. Think those nearing their retirement age. Conservative funds have a much lower appetite for risk – therefore, they cannot expect very huge returns but they can be assured that their money stays protected with some interest (much higher than the bank offers).

Conservative funds are invested in low risk securities such as bonds, treasury bills, deposit accounts such as time deposits and money market funds.

Balanced funds

Of course, there are those who would like to stay on the safe side but still be able to take on a bit of risk. Balanced funds are, as the name suggests, a mix of both funds mentioned above.

Why choose mutual funds?

Although we did end up opening a stock market account of our own, we chose to set up our mutual funds account for many reasons:

because we had zero knowledge on stock trading (and had no time to learn it)

because we wanted our money to be in the best hands – mutual funds are managed by fund manager whose sole job is to study and analyze the market so the money is able to generate the highest possible returns at the lowest possible risk

because we wanted to lessen ourselves the headache of choosing which stocks to put our money in

because we wanted to get into the habit of setting aside some money for our future, and not worry about the rest

because it provides higher returns compared to what banks are giving us

Of course, because mutual funds are managed by a company, you incur fees such as entry and exit fees, which pays for the management of the funds.

Which mutual fund should I choose?

There are many factors to determine which type of mutual fund to invest on.

For example, some companies will have to assess on whether you are an aggressive or a conservative investor or somewhere in between.

This can be determined by:

learning your risk appetite, or how much risk can you take: 10% loss? 20% loss?

your investment horizon, or the time you can do without having that money with you: will you use the money in 5 years? 10 years?

your age: young people are often recommended aggressive funds because there’s still a lot of time to get back any losses and possible doubling the returns; obviously, if you are much older and plan to invest your retirement money, you will be recommended with a conservative fund

Ultimately though, the decision will always be up to the investor.

How often should I top-up my mutual funds account?

It generally depends upon the investor.

Personally, we use the cost averaging method, which means that we put in an amount every month (sometimes more frequently, when there is extra money to add) because then, it is able to ride along the highs and lows of the market. You have to remember that the stock market is very volatile and can change every so often, so you have to be flexible enough to go along with it.

For some people, investing a lump sum – and then forgetting about it – is the best way to go. Obviously, we did not go this route because we did not have any lump sum to add to our mutual funds account, and we’d probably spend a bulk of that money somewhere else, as we are still building our family and our finances.

A common question I get asked: is topping up MANDATORY? NO. You have full control over how much (a minimum of Php1,000) or how often you add money into your funds. You can just open an account and forget it, really. But, if you want to maximize your savings and returns, I suggest doing it regularly.

How long should I stay invested in mutual funds?

While mutual funds are designed for long term investing, how long you place it in there still depends upon you, the investor.

According to some, staying invested for at least a year is okay – but I personally recommend going three to five, or even more.

You might also have to check out the policies for your mutual funds: ours waive the exit fee for money that is six months old (which only encourages the investor to have their money invested for the long term).

We also found out that the 6-month-old rule is not for your account but for every amount you put in. For example, if you decide to withdraw money from your mutual funds account on August, the funds that you put in between February and July will incur an exit fee. Of course, you have the option to withdraw the funds that you invested in January and earlier.

Our personal experience investing in mutual funds

From our five-year experience being invested in mutual funds, we started at a rather high value, which went down on year 2 and 3, and then slowly making its way back up year 5.

We’ve made several wrong moves along the way as well, such as withdrawing a huge bulk of that money to 1) make a huge purchase for a WANT, and 2) pay off a NEED. In total, we probably incurred a loss of around Php6,000.

A few things to consider before you start investing in mutual funds:

make sure you have the discipline to set aside some amount of money on a regular basis to invest (the earlier you start investing, the bigger your returns can become – this is the rule of compounding!; and yes, even Php1,000 a month is already something!)

make sure you have already set aside some money for emergency funds (I’d suggest building your baby EFund – or a month’s worth of expenses – to make sure you don’t withdraw your investments in times of REAL EMERGENCIES like we did)

make sure you have the discipline to stay away from NON-EMERGENCIES (of course, you can still buy things for leisure, but make sure to keep this a separate budget from your investment or emergency money)

Now that you know everything that we know about mutual funds, it’s time to put it into action!

Are you ready?

Where to open a mutual funds account?

There are a number of mutual funds companies here in the Philippines. You can check out PIFA to see if a company is legit, and also see their past fund performance.

Most companies require at least Php5,000 to open an account, which we think is the biggest hurdle to get over.